How Much Money Should a Charity Keep in Reserve?

Why a familiar rule of thumb can mislead

You may have heard that every charity should hold three or six months of running costs. It is a convenient starting point for a conversation, but not a universal rule. A charity with regular unrestricted income and flexible costs has different risks from one employing specialist staff on short-term grants. A charity running a residential service cannot necessarily reduce spending overnight if funding disappears. The right reserves target depends on what would happen if income stopped, an unexpected bill arrived or services had to close safely.

First, work out what is really available

The balance in the bank is not the same as free reserves. Money restricted by a funder must be used for the purpose it was given for. Buildings and other assets needed to deliver services are not cash you can spend on salaries. Some unrestricted funds may already be designated for essential future commitments. Ask your finance lead to show the bridge between total funds, unrestricted funds and the amount genuinely available to absorb unexpected costs.

Think about the worst ordinary month

Start with a rolling cash-flow forecast and identify predictable pinch points: grant payments that arrive late, seasonal fundraising, insurance renewals, payroll, rent and contract endings. Then consider less predictable events. Could a vehicle break down? Might a grant not renew? Would you need to fund redundancy, safeguarding arrangements or a managed closure? You do not need to imagine every disaster, but you should understand the financial consequences of the risks most relevant to your charity.

Write a policy that explains the number

A useful policy states the target amount or range, how trustees calculated it, the actual level held and what the charity will do if reserves are above or below target. If you have no reserves, explain how you are managing the resulting risk and whether you have a realistic plan to build them. Review the policy alongside your budget, not as a paragraph copied into the annual report at the last minute. The Charity Commission expects trustees to justify their approach, including a decision to hold no reserves.

Reserves are there to be used when appropriate

Some boards become so focused on protecting a reserves target that they forget why the money exists. If the risk you planned for actually occurs, drawing on reserves may be the right decision. Record the reason, assess how much remains and agree how the position will be rebuilt if necessary. Equally, holding substantial unrestricted funds without a clear purpose can mean opportunities to help beneficiaries are being missed. The aim is resilience, not the largest possible bank balance.

Give the board a dashboard it understands

At each meeting, compare actual free reserves with the target and show projected cash over the coming months. Explain major changes in plain English. A grant that appears as income but cannot pay core costs should be visible in the reporting. When reserves fall sharply, trustees need to know whether it is a

temporary timing issue or a deeper problem in the operating model. Those conversations are much easier before a crisis arrives.

If your board has not reviewed its reserves policy recently, share this article with your treasurer and put it on the next agenda. Explore MH360’s resources for charities.